Free Markets, Free People


Is the economy set on "rebound"?

That’s kind of what some pundits are hinting with the latest "official" unemployment numbers.

But as the three of us noted on yesterday’s podcast, that number is only a slight glimmer in an otherwise dark picture. And the underlying unemployment numbers (and trends) don’t really support the reduction of last week (the number of new private sector jobs was not enough to maintain the unemployment number). Or said another way, it is most likely a temporary blip. Another ominous development that doesn’t bode well economically is the precipitous rise in oil prices and the impact that will have on any recovery. In a word, the impact it will have is "bad".

Oil is one of those commodities that has a very broad impact on economic activity. It is, until an alternative or substitute is found, the literal life-blood of our economy.

How does oil staying in the $104 to $107 a barrel range sound? Not very good, obviously. As one refiner told me, his only control over how much the fuel he refines costs when it leaves his refinery is the economies he can wring out of his equipment, but the cost of the goods coming in are beyond his control. So that cost per barrel is what he’s paying as the crude shows up at his refinery for processing.

How long will it stay over $100 a barrel? Well, many are saying quite some time:

Oil prices climbed to near $106 a barrel Monday as intense fighting between Libyan government forces and rebels appeared to be turning into a civil war and raised the prospect of a prolonged cut in crude exports from the OPEC nation.

By early afternoon in Europe, benchmark crude for April delivery was up $2.25 to $106.67 a barrel, the highest since September 2008, in electronic trading on the New York Mercantile Exchange. The contract had gained $2.51 to settle at $104.42 a barrel on Friday.

[…]

Citigroup said it raised its 2011 average forecast for Brent crude to $105 from $90, but doesn’t expect the violent protests in North Africa and the Middle East to spread to Saudi Arabia, the world’s largest oil exporter.

"We assume that output disruption is maintained through the second quarter," Citigroup said in a report. "Output disruption, or at least the threat of, will support a fear premium for the rest of 2011."

As mentioned in the article, most now view the war in Libya to be a civil war. And, reports today say that Gadhafi’s forces have had some successes against rebel forces (apparently neither side is particularly swift in the combat portion of battle). Reports also point to other countries possibly helping the rebels. And we know there are "friends" of Gadhafi, mostly found in the socialist South and Central American countries, who will try to help the dictator maintain power.

The initial shock of the turmoil in Libya has worn off the markets and they are now looking at a prolonged reduction of capacity with Libya off line.  And, we’re seeing unrest in other Arab oil producing states as well.  Unrest, or instability, drives the price of oil up.

So it isn’t surprising that in the last two weeks, the price of gasoline rose at its second fastest pace ever:

Gasoline prices in the United States posted their second-biggest increase ever in a two-week period, due to the rise in crude oil prices stemming from the turmoil in Libya, an industry analyst said Sunday.

The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the previous survey on Feb. 18.

The most it ever jumped was in 2005 when hurricane Katrina hit.  But that was soon solved because the event itself wasn’t prolonged as is a civil war.  So chances are, this isn’t the end of the rising price of gasoline.

As you might expect our national leaders have managed to put us in a position where we essentially have nothing to answer with domestically.  In fact, as I recall, we’ve been told repeatedly for the last 20 or so years that bringing significant new assets on line would take at least 10 years or so and thus, I guess, shouldn’t be done.  Er, yeah, ok and where would we be now if we had committed to that 10 years of bringing them on line 20 years ago?  At least better off than we are now.

And most likely not talking about using the strategic reserve I’d bet.  FYI, the strategic reserve is not supposed to be a tool for the use of politicians to drive down the price of gasoline when their failed energy policies show up at the pump.  It is a reserve for use by our military in case we’re cut off from the foreign oil we’ve become even  more dependent upon.

But back to the economy.

Does anyone really need an explanation of the impact higher fuel prices will have on a barely recovering economy (not to mention unemployment)?  And, with the specter of inflation rising – not to mention food prices – how likely is the impact to be “minimal”?

Yeah, it’s not.

And, as usual, we’re in a basically no-win situation thanks to the foresight of our elected leaders and their wonderful job of putting a practical energy policy in motion.  A 10 month drilling moratorium (and the jobs that go with it) with no real end in sight.

Brilliant.

So to the original question – is the economy set to rebound?

Unfortunately if it was, it most likely will be one of the shortest rebounds in history.

~McQ

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34 Responses to Is the economy set on "rebound"?

  • Time to bring back “Drill baby, drill”

  • You can’t write this stuff …
    Barack Obama told Americans Saturday in his Weekly Address,

    “We need a government that lives within its means.”

    Today we get the worst deficit for a February, evah .. $261 billion .. Bush had years that were better.
    Meanwhile, there is a fight over $60 billion in cuts to a $3.4 trillion budget as being … pick your own hyperbole.
    .. and Rep. Jesse Jackson Jr. told Congress last week that the way out is to “give each ghetto kid an iPod and a laptop” (both probably made in China).
    Like I said, you can’t write this stuff.

  • The initial shock of the turmoil in Libya has worn off the markets and they are now looking at a prolonged reduction of capacity with Libya off line.  And, we’re seeing unrest in other Arab oil producing states as well.  Unrest, or instability, drives the price of oil up.

    Yeah, but the supply hasn’t actually been affect yet.  Not one wit.  This is purely a speculative price impact.

    Now a commodity like gold, when you have prices speculated up, eventually they crash on one of the investors is left holding the hot potato.

    I wouldn’t mind the price spike, except I somehow don’t see the crashed price.  Somehow the elevated prices need to work their way through the system before cheaper prices arrive while price increases go to the pump almost instantly.  Its happened too often now I call BS.  Basically instead of one of the investors getting stuck with the hot potato which helps moderate speculation, it gets to be passed onto consumers.

    • You remember the LAST time there was talk of cracking open the Strategic Petroleum Reserve…???
      I COULD be wrong, but it seems we had a Deemocrat in the WH…
      This one has a CONCERTED PLAN to diminish the U.S. by things like his GULF War…our Gulf.

      • Using the strategic reserve for this manner is useless.

        I don’t know what that has to do with my pricing concern, though.

        • jpm, it isn’t like there is some big conspiracy.  Have you ever read any economics?  I recommend Thomas Sowell’s Basic Economics.
          One thing that markets do WONDERFULLY is transmit information.  Speculators are IMPORTANT players in the market, not a bunch of worthless parasites.  They deal in RISKS, not really commodities.  They BET on future outcomes.
          What you are seeing is a lot of people betting on BAD outcomes.
          Even the guy who owns a service station is NOT interested in what the fuel in his tanks costs.  It is what the NEXT load of fuel will cost that he uses to set his prices.

          • Conspiracy?  Not exactly.

            The pendulum should swing both ways, it never does.  When it doesn’t I have every right to at least suspect interference.  Or do you believe people have never monkeyed with politicians or bureaucrats to give themselves or their corporations an undo advantage?

            How does this price serve me in any way, shape, or form?  There’s no supply problem yet.  These elevated prices isn’t making more fuel available.  And if Libya stabilizes, the price will drift back to normal.  I’ll have paid an elevated price and have gotten zip out of it.  There should be a minor glut and price should slingshot under normal for a short time.  Just like most markets where supply/demand was misjudged.

            Imho, the market isn’t behaving like it should and its because of a lack of competing entities.  The prices go up based not on actual supply and demand but on public perception whether there’s an excuse to prevent too much outrage.

            Even more incredulous are price hikes on holiday weekends.  Sure there is more demand, but there’s a ton of statistical data from past years and there shouldn’t be any surprises.  If you look at Christmas shopping, there’s insane sales taking place.  Increased demand and decreased prices.  Because competing entities are trying to grab or retain their piece of the pie.  None of that seems to take place with gas.

          • Speculators can be Democrats who donate to keep volatility high.

          • So you’re saying the price of gasoline never goes down?
            You ARE aware that recently, gas was as cheap in real dollars as its been in decades, right?
            Prices ARE perceptions, as I tried to explain.  And, in this market, supply will be LESS effected by price information because of a VERY big distorting factor…GOVERNMENT.  Oil producers CANNOT respond with the regulatory thugs preventing them.

          • Its not that prices never go down.  They never undershoot the stable price. 

            Yes, I understand they are a victim of Regulatory Paralysis.  Funny thing is, it seems to make them buckets of money.  In fact, the whole “tension” between oil companies and government is starting to seem like a farce. 

            And 11 years ago the price of gas was $1.20.  Inflation hasn’t been that bad that $3.50 is comparable. 

        • Use the strategic reserves DOES have a use other than political.  Opening the reserves would increase supply pushing down cost per barrel.  But, it is really nothing more than a delay of the increased cost because in order to refill the reserve later, the price will go back up.  So, using reserves is like taking a loan: it’s cheaper now, but more expensive later.  There’s other costs a well: lowering the volume of the reserves reduces our capability to weather a more severe shortage later.  In other words, 300 bbl is less of an asset than 700 bbl.  If Saudi Arabia goes the way of Libya, than a smaller reserve would be a death sentence to our current economy.  In general, everyone agrees that using the reserves for mere political gain in asinine.  Of course, that doesn’t stop the politicians from doing it.  That should tell you something about our politicians.

          • The amount of supply that we could pull from the Strategic Reserve in a timely manner wouldn’t replace the 7% supply of oil that Libya contributes to the world.  It wouldn’t dent it anytime soon.  Therefore its effect on prices would be negligible.

          • jpm100,
            I agree.  I don’t think it would totally offset the change in price per barrel, but I didn’t argue that anyway.  But that doesn’t mean that our politicians won’t tell the American people that they’ll keep gas at the pump cheap by drawing from that reserve.  Again, I DON’T think it’s a wise thing to do.

          • And “pushing down the cost per barrel” isn’t a political move?

            A) who has to order it and B) what lasting effect would it have (seeing it is a finite amount).

            Finally C) what happens if, in the meantime the ME blows up and we’re cut off from oil from the region?

          • McQ, Again, I think you are trying to interpret too much into what I wrote.  I think part of that is the limitations of blogs and replies.  This is the 2nd or 3rd time in a row.  Anyway… Yes, tapping the strategic reserve in any event short of WWIII or something like it IS a political move.  I was not trying to state that it was apolitical.  My points were simply: 1. there do exists other reasons why the reserve could be tapped; 2. tapping the reserve is not without long-term consequences; and 3. it REALLY isn’t a good idea.  I think, once again, you are I are in agreement and we’re just not communicating it correctly.  Sorry.

          • Yeah, I read comments in the WP dashboard. I’ll admit I sometimes misinterpret the context of a reply. If that’s the case with you, my apologies.

        • Simple enough, it’s Bush and Cheney.

          Oh wait….this is an old talking points memo – I have to get the new one, hang on.

  • Is the economy set on “rebound”?  Hell, NO.
    This regime is STILL spinning off uncertainty threads like the mother of all Steven King evil clown cotton candy machines at the carnival of hell.
    They not only don’t understand market capitalism, they HATE it.

    • It’s been trying to “double dip” for the last 6 months.  This “oil shock” should do it.

  • So to the original question – is the economy set to rebound?
    Unfortunately if it was, it most likely will be one of the shortest rebounds in history.

    More like a dead cat bounce than a rebound.

  • I think we should investigate the oil companies. Again. Hasn’t  anyone but me noticed that whenever we investigate the oil companies the price comes back down? It’s obviously because they get scared their evildoing will be exposed.

    • It comes down when the don’t as well … a stopped clock is right twice a day.
      The “opening the Strategic Oil Reserve” gambit is usually a good bluff to get the speculators to jump out of the market (for a day or so). It really doesn’t matter if they only release a barrel or a million barrels.

  • The problem in Libya will be nothing compared to what happens if there is a revolution in Saudi Arabia.  If that happens then there are predictions for oil going to $200/barrel.  Think of what $7.50 to $8.00 for a gallon of gas will do for the ‘recovery’.
    Another thing that is not often discussed is how QE2 is driving an equities bubble in the stock market.  Again, this is not a recovery.  It is just Ben dropping cash out of helicopters over Wall Street.

  • The Economics of high fuel costs should frighten everyone.

    I may not represent most people, but I know enough people like me, that my predilections will be followed, in part, by many.

    I am inclined to not register my boat this year, if my boat sits out the season in a boathouse, I am much less likely to travel the 100 miles to the summer cottage every weekend, which means I won’t be spending my money at up-country stores, restaurants, farm stands and gas stations. I’m likely to live as frugally as I can, close to home. If I’m not up-country, my guests can’t come to visit, and their money doesn’t get spent up there.

    Where my cottage is located in Maine is a tourist-based economy, like most of Maine, New Hampshire and Vermont is. When flat-landers like me stay away, they starve, literally.

    $5/gal gas will be disastrous.

    • Imagine being an independent trucker…
      Imagine the ripple effect on inflation IF fuel surcharges are adjusted to that the trucking business is not wiped out.

      • I think you’re too optimistic here.  Fuel surcharges WILL be adjusted and passed on to the consumer.  Do you really think that the truckers, independent or corporate, would be willing to commit financial suicide just so that our price on oranges, cheap T-shirts, and TVs will stay down?  I think not.  The price adjustments may not show up immediately, but they will show up.

  • Some of the oil price increase, though, is the quantitative easing that has pumped billions of dollars into the economy and ended up in the stock market and commodities.

    • QE is part of the problem.  Combine it with a supply disruption while the ME sorts itself out and you have the makings for a fiscal crisis here at home.

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